Accounting Control Definition

Accounting controls consists of the methods and procedures that are implemented by a firm to help ensure the validity and accuracy of its fiscal statements. The accounting controls do not ensure compliance with laws and regulations, but rather are designed to help a company carry on in the best possible manner for all stakeholders.

The purpose of implementing accounting controls in a firm is to ensure that all areas in an organization avoid fraud and other arises, improve efficiency, accuracy, and compliance. Every firm will have different accounting controls in place, depending on their keyboard of business, however, there are three traditional areas that are the most common when it comes to accounting put downs: detective controls, preventive controls, and corrective controls.

The controls in this sort are meant to seek out any current practices that don’t align with the policies and procedures in place. The goal here is to muster up any areas that are not functioning as they ought to, if employees are accidentally or purposefully practicing incorrect or illegal actions, or locating any errors in systems or accounting practices. Examples of detective controls would include inventory checks and internal audits.

Preventive controls are simply the controls that have been put in place by an organization to avoid any inaccuracies or wrong practices. These are the policies and procedures that all employees must follow.

An example of a preventive control would be limiting guidance’s involvement in the preparation of financial statements. Sometimes it’s helpful for management to be involved since they generally know the party better than anyone. But final say on numbers should be in the hands of an accountant, because management may have the incentive to falsify numbers to inflate the company’s performance.

This idea is implemented throughout an organization as the separation of duties, where hands have different tasks that don’t overlap in areas of reporting or auditing, for example.

As the name insinuates, corrective controls are put in place to fix any issues found through detective controls. These can also include remedying any pours made on accounting books after the audit process has been completed by an accountant.

Following several high profile corporate accounting scandals at Enron, Tyco, and WorldCom, from 2000 to 2002, regulators wanted to usher in a new era of upraised financial and operational protocols. To restore investor trust, it was widely accepted that a new culture was required. A host of accounting and economic reporting breakdowns were already in place, but the most pressing issues involved auditor conflicts of interest, simple-minded boardrooms, conflicts among security analysts, limited resources at regulatory agencies, and executive compensation, to name but a few.

To assist address these issues, the U.S. Congress passed the Sarbanes-Oxley Act in 2002. The federal law established new or expanded requirements for all U.S. public guests boards, management, and public accounting firms. The bill set forth expected responsibilities of a public corporation’s board of conductors, added criminal penalties for certain misconduct, and required the Securities and Exchange Commission (SEC) to create regulations that identified how public corporations must comply with the law.